Financial constraints and corporate investments during the current financial and economic crisis: The credit crunch and investment decisions of Slovenian firms

- We investigate the effect of financial constraints on investments of Slovenian firms.
- Corporate investments were significantly affected by financial constraints.
- The effect of financial constraints intensified in 2009 and alleviated slightly in 2010.
- Financial constraints have a significant effect in both more and less levered firms.
- Financial constraints affected corporate investments in small firms more severely.

We investigate the effect of financial constraints on the investment decisions of Slovenian firms during the current financial and economic crisis. By estimating the error-correction model and the Euler-equation specification, we found that corporate investments were significantly affected by financial constraints during the crisis. The effect of financial constraints intensified in 2009 and alleviated slightly in 2010, although still being significantly more intense than before the crisis hit the economy. By estimating a switching regression model with unknown sample separation that enabled us to address the problem of judgemental sample separation, we were also able to estimate the error-correction model separately for financially constrained and financially unconstrained firms. The results indicate that financial constraints have a significant effect on both financially constrained and financially unconstrained firms, although corporate investments were more severely affected in financially constrained firms.